M5 Loss Limitations For Individuals Flashcards
A taxpayer reported the following in a tax year:
Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in the partnership. What is the taxpayer’s adjusted gross income for the year?
$122,950
Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
Total AGI 122,950
MCQ-06161
The term active participation for a passive activity loss is relevant in relation to:
Rental real estate activities.
Active participation in rental real estate activities allows the taxpayer to deduct losses from the rental activities against other income, subject to limitation.
MCQ-14911
Which of the following statements about treatment of net passive activity losses of an individual is correct?
Net passive activity losses are suspended and carried forward to offset passive income of future years.
Passive activity losses can only offset passive activity income. Net passive activity losses are suspended and carried forward to offset passive activity income in future years.
MCQ-15834
Which of the following would be treated as passive activity income under the passive activity loss rules?
Income from a taxpayer’s limited partnership interest.
All income and loss items are sorted into three categories under the passive activity loss rules. Under these rules, income or loss is either considered active, passive, or portfolio.
Income from a limited partnership interest is automatically considered passive income.
MCQ-12521
Passive activity losses of an individual taxpayer can generally be used to offset:
Income from the rental of a residence
Passive activity losses (PALs) can only be offset against passive activity income, not active or portfolio income. Passive activities are trade or business activities in which the
taxpayer does not materially participate. Rental real estate is a passive activity unless the taxpayer is a real estate professional.
MCQ-07173
An individual taxpayer reports the following items for the current year:
Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates $70,000
Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate
(9,000)
Rental income from building rented to a third party 7,000
Short-term capital gain from sale of stock 4,000
What is the taxpayer’s adjusted gross income for the year?
$74,000
Ordinary income from partnership A, operating a movie theater in which the taxpayer materially participates $70,000
Rental income from building rented to a third party (a passive activity) 7,000
Net loss from partnership B, operating an equipment rental business in which the taxpayer does not materially participate
(per the above rule the taxpayer can deduct only $7,000 of the $9,000 passive activity loss) (7,000)
Short-term capital gain from sale of stock (fully taxable) 4,000
Adjusted gross income for the year $74,000
MCQ-08213
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities.
What amount of the rental losses may Smith deduct in determining taxable income?
$15,000
Generally, none of the passive losses from real estate are deductible against nonpassive income. However, Smith actively participates, which means that the “mom and pop” exception of up to $25,000 will apply. This exception is phased out over AGI of $100,000 through $150,000. That is 50 cents on the dollar. Smith’s AGI is $120,000. That is $20,000 into the phaseout range. So $10,000 of the $25,000 is phased out and Smith may deduct $15,000 of the $40,000 passive loss.
MCQ-08217
A review of Bearing’s Year 2 records disclosed the following tax information:
Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s Year 2 adjusted gross income?
$29,000
Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental loss from residential property (25,000)
Total Adjusted gross income (AGI) $29,000
A max of $25,000 can be deducted from rental loss when it is active
MCQ-14928
A taxpayer employed full time as an engineer has the following income items:
Self-employment income $50,000
Rental income 15,000
Dividend income 2,000
Long-term capital gain 1,500
Short-term capital loss 1,000
What amount is the taxpayer’s passive income?
$15,000
The rental income of $15,000 is automatically passive unless an exception applies (mom-and-pop exception or real estate professional). The self-employment income is active
income. The dividend income, long-term capital gain (LTCG), and short-term capital loss (STCL) are portfolio income.
MCQ-06515
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000.
What amount of the rental real estate activity loss was deductible?
$15,000
Only $15,000 of the $35,000 rental real estate passive activity may be deducted against the $15,000 passive income from the S corporation. The remaining $20,000 passive activity loss is carried forward to be used in future years. The “mom and pop exception” does not apply because the taxpayer’s modified AGI is more than $150,000.
MCQ-11777
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity
Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity. The at-risk amount is also referred to as at-risk basis. Note that although in the textbook we discuss this for partnerships, the concept applies to all activities that have flow through income and losses.
MCQ-11778
Which of the following statements regarding an individual’s suspended passive activity losses is correct?
Suspended losses can be carried forward, but not back, until utilized.
Tax rules allow suspended passive losses to be carried forward, but not back, until utilized.
MCQ-01811
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in the current year from rental real estate in which he actively participated. What amount
of loss attributable to this rental real estate can be used in the current year as an offset against income from nonpassive sources?
$0
Cobb may not use any of the loss attributable to his rental real estate as an offset against income from nonpassive sources in the current year because he does not qualify for the “Mom and Pop” exception. Under this exception, up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate may be used as an offset
against income from nonpassive sources. This $25,000 allowance is reduced, but not below zero, by 50% of the amount by which the individual’s modified AGI exceeds $100,000. The $25,000 is therefore completely phased out when modified AGI reaches $150,000. Because Cobb’s AGI was
$200,000, he did not qualify for the exception.
MCQ-06697
A married couple reported the following items for the current year:
Salaries $95,000
Dividends 1,000
Interest income on savings account 500
Loss from rental real estate (2,000)
Both spouses actively participate in the rental real estate activities. What is the taxpayers’ adjusted gross income on a joint return for the year?
$94,500
Salaries $95,000
Dividends 1,000
Interest income on savings account 500
AGI excluding loss from rental activity $96,500
Loss from rental real estate (2,000)
Total AGI $94,500
In the current year, a taxpayer reports the following items:
Salary $50,000
Ordinary business income from partnership A, in which the taxpayer materially participates 20,000
Ordinary business loss from partnership B, in which the taxpayer does not actively participate (40,000)
During the year, the taxpayer disposed of the interest in partnership B (no gain or loss). The taxpayer had a suspended passive activity loss (PAL) carryover of $10,000 from prior years for partnership B.
What is the taxpayer’s adjusted gross income for the current year?
$20,000
Salary $50,000
Partnership A ordinary business income 20,000
Partnership B ordinary business loss (40,000)
Partnership B suspended PALs (10,000)
Total Adjusted gross income $20,000
